Ambani, Tata ‘Islands’ Shrug Off Grid Collapse: Corporate India

Abdul Qasim, an accountant who works at Tata Motors Ltd. (TTMT), wasn’t aware of the world’s biggest power outage until he finished work in the Indian city of Jamshedpur.

He didn’t have to go far to learn about the blackout. Qasim broke his Ramadan fast with his family under candle light. Barely 10 kilometers (6 miles) away, truck production at the Tata Motors factory located in the city continued with minimal disruptions even as the state-owned national grid collapsed on July 31 knocking out supply to 640 million people.

About 1.6 trillion rupees ($29 billion) spent by companies including Tata Motors and billionaire Mukesh Ambani-led Reliance Industries Ltd. (RIL), to quarantine their plants from the national grid is shielding India’s biggest users of electricity from disruptions. Sixty years of missed investment targets, transmission losses and theft is prompting factories to build their own plants boosting costs in a nation that suffers from the fastest pace of inflation among BRIC nations.

“Large Indian companies have created their own islands as they can’t rely on a precarious state power network,” Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which oversees about $1.1 billion in emerging-market assets, including Indian stocks. “The outage this week will spur companies to make more investments to cushion themselves against such shocks.”

Biggest Users

Five of India’s biggest electricity users generate 96 percent of their requirement, according to their annual reports. Reliance Industries, which runs the world’s biggest oil refining complex, produced almost all of the 11.8 million kilowatt hour it used in the year ended March 31, according to data compiled by Bloomberg.

Shares of the companies with factories in the affected regions shrugged off the outages. Tata Motors rose to the highest in two weeks on July 31, while Reliance gained 3 percent this week. In comparison, a similar blackout in North America in 2003 caused losses of as much as $10 billion, according to a study by the U.S. and Canadian governments.

The distribution network operated by Power Grid Corp. of India Ltd. collapsed on two consecutive days this week, exposing infrastructure bottlenecks that have retarded growth and increased costs in the $1.8 trillion economy as Prime Minister Manmohan Singh battles threats of a drought and potential rating cuts by Standard & Poor’s and Fitch Ratings.

Missed Targets

India has missed every capacity addition target since 1951, underscoring the urgency behind Singh’s effort to boost investment in power. As much as $300 billion, or 30 percent of the total spend planned on infrastructure, over the next five years is on the electricity sector, according to Planning Commission Member B.K. Chaturvedi.

The network in Asia’s third-largest economy loses 27 percent of the power it carries through dissipation from wires and theft, while peak supply falls short of demand by an average of 9 percent, according to India’s Central Electricity Authority. Some 300 million people in India, or one in every four, remain without links to the grid and the number will still be about 150 million by 2030, according to the Paris-based International Energy Agency.

The blackout engulfed as many as 19 of the South Asian country’s 28 states on July 31, with more than 100 intercity trains stranded on the second day. It also affected output at Tata Steel Ltd. (TATA)’s plant in Jamshedpur, the company said.

Refineries Protected

While refrigerators and air conditioners at homes failed, Indian Oil Corp. (IOCL), the biggest refiner, said its own power stations and distribution lines protected its refineries in northern India from the outage. National Aluminium Co., India’s largest state-run producer of the metal, provided one-tenth of its power capacity to the grid as a “goodwill gesture,” said Chairman B.L. Bagra.

Delhi International Airport Ltd., a unit of billionaire G. Mallikarjuna Rao-controlled GMR Infrastructure Ltd. (GMRI), switched to its own backup power within 15 seconds, the company said in a statement.

“There was no significant impact from the outage,” said Debasis Ray, spokesman for Tata Motors. “We get our electricity from Tata Power, which isolated itself from the grid.”

The outages may spur more manufacturers to set up their own generation units, according to the Indian Captive Power Producers Association. Indian companies have at least 35,000 megawatts of captive power capacity, Neerja Mathur, a New Delhi- based chief engineer in the Central Electricity Authority, said by telephone Aug. 2. About 13,000 megawatts of additional captive capacity is likely to be connected to the national grid in the five years to 2017, she said.

Coal Shortage

Companies plan to set up more than 33,000 megawatts of new captive power capacity and applications for approvals are pending with various state agencies, Rajiv Agrawal, New Delhi- based secretary of the power producers’ lobby said on Aug. 2. Some of these stations may not be set up because of a shortage of coal supplies, he said.

“There is a lack of government commitment when it comes to ensuring coal supplies to industries that are willing to and are already spending money in setting up power projects,” Agrawal said. “These companies have to build new competencies in running power business as the grid isn’t dependable.”

The pace of growth in generation has failed to keep up with demand because of a shortage in coal and natural gas supply, and deficient monsoon rains.

The world’s second-most populous nation suffers from frequent power outages that can last as long as 10 hours, amid summer temperatures of as high as 45 degrees Celsius (113 degrees Fahrenheit) in the capital, New Delhi. Power supply shortages shave about 1.2 percentage points off the nation’s annual growth, according to the Planning Commission.

“A power failure during the fasting month of Ramadan is the last thing you want,” said Qasim from Jamshedpur. “The heat was unbearable in the mosque during prayer time.”

Inflation Forecast

Subsidized electricity to farmers is also exacerbating electricity-supply bottlenecks, discouraging producers from adding capacity. India deliberately abandoned metering power supply for agricultural irrigation in the 1970s, as part of a strategy of switching to new high-yield crops, which required regular water supplies, Miriam Golden of the University of California and Brian Min of the University of Michigansaid in a report published in April.

Prices of energy, including power, diesel and kerosene, are sensitive issues in India where about 800 million people live on less than $2 a day. Price increases are often opposed by political parties and spark street protests.

The Reserve Bank of India refrained from raising its benchmark interest rate on July 31 amid the slowest pace of growth in almost a decade and raised its inflation forecast to 7 percent from 6.5 percent, citing rising food prices and lack of roads, ports and power plants.

‘Wasteful Expenditure’

“Infrastructure inadequacies and faulty policies are counterproductive when you are fighting persistent inflation,” said Sujan Hajra, chief economist at Anand Rathi Financial Services Ltd. in Mumbai. “It’s extremely difficult for the RBI to support growth in this environment.”

Raju Kanoria invested 900 million rupees in a chemicals plant that operates only three days a week because he hadn’t built a captive power unit for assured electricity supply. Now, his Kanoria Chemicals & Industries Ltd. (KC) is spending an additional 25 million rupees on a 2-megawatt generator in the southern state of Andhra Pradesh. This may triple the cost of power and delay breaking even.

“It’s unfortunate that even businesses with such small need for electricity are having to resort to captive power,” he said. “It’s such a completely wasteful expenditure.”